SoundExchange & A2IM Sued For Antitrust Violations By Sirius

from the sirius-charges dept

Well, well. Last fall, we discussed how Sirius XM was aiming to cut out SoundExchange and try to do deals directly with labels for performance rights. There's some history here. SoundExchange was set up and spun out of the RIAA specifically to collect performance royalties from Sirius XM and emerging internet streaming offerings. Radio doesn't pay performance rights to musicians (they just pay mechanicals to songwriters/publishers), and while the RIAA has wanted that to change for years, it used the "newness" of satellite and the internet to suddenly claim that this extra tax must be paid there, and then set up SoundExchange to collect it. The "rate" was a statutory rate set by the Copyright Royalty Board (CRB), which involved a huge fight, with SoundExchange basically demanding a significant cut of everyone's revenue. The CRB eventually agreed to a sliding rate starting at 6% and moving up to 8% over time -- much, much lower than what SoundExchange wanted (there was an even more intense fight over internet rates, but that is a separate issue).

Even with this "lower" rate, Sirius XM provides a huge chunk of SoundExchange's revenue -- around $200 million last year alone. Realizing that the deal that set up SoundExchange noted that it was "nonexclusive," Sirius sought to cut SoundExchange out of the loop and go direct to labels. Obviously, Sirius's goal is to pay less in royalties, and that led some to wonder why a label would want to do it, since the royalty rate would be lower. Except, it's a little more complex than that.

Sirius notes that in cutting out the middleman, you avoid SoundExchange's (hefty) administrative fee, as well as its notoriously opaque payment process which has left many labels scratching their heads. SoundExchange provides little information as to why artists get paid what they're paid, leaving open significant concerns that the money is not being accounted for properly. Similarly, SoundExchange has been notorious for having "difficulty" finding artists -- though I will say that they've definitely been improving a lot on that front, and really have made a huge effort to reach out to artists. Still, there certainly could be benefits for labels to go direct. Cutting out the middleman, having more relevant and accurate data, as well as more timely payments could certainly be worth it. In fact, Jeff Price at TuneCore explained how indie artists who were their own labels would almost certainly benefit by going direct.

However, the wider industry flipped out and closed ranks, with SoundExchange, the RIAA and A2IM (like the RIAA but for indie labels) all urging labels not to have anything to do with direct deals. Sirius XM looked at all of this and saw a clear antitrust violation as it certainly feels like the entire industry colluding against it. To that end, it has sued SoundExchange and A2IM for antitrust violations -- and even gone so far as to ask for SoundExchange to be "dissolved and unwound." While the actions of other music industry trade groups -- including the RIAA, NARAS, AFRTA and AFM -- are mentioned in the lawsuit, they are not listed as defendants (yet). The focus is very much on SoundExchange and A2IM, whose boss, Rich Bengloff, sits on the board of SoundExchange (along with a bunch of RIAA folks).

In the filing (embedded below), Sirius reports on multiple attempts it made to sign deals with indie labels, in which it was repeatedly rebuffed with claims about how Rich or A2IM had urged them not to do direct deals.

For example, Sirius XM's direct license outreach to independent label Bandit
Records was short-circuited when a representative of Bandit Records told Sirius XM that
"[w]e're members of A21M and Merlin. I think that prevents a direct license." Upon
information and belief, one or both Defendants communicated with Bandit Records (or through
its representative Merlin Network) and pressured them to refuse a direct license.

O. Sirius XM's effort to engage in direct license discussions with independent label
Unitedlnterests was similarly derailed when, on August 30, 2011, a representative of
Unitedlnterests wrote: "I heard that XM was making these requests. I will look at the license,
but will also confer with A2IM and other indies." Upon information and belief,
UnitedInterests pursued those discussions and therefore agreed with A2IM and/or other record
companies not to enter into a direct license.

Sirius XM's approach to independent label CA Management was stopped in its
tracks when, on October 27, 2011, a representative of CA Management told Sirius XM that he
was "getting mixed reviews about the best way to handle" the direct license offer. Several weeks
later, on November 15, 2011, he told Sirius XM that "the RIAA has asked everyone to hold off."
CA Management never entered into a direct license with Sirius XM because, upon
information and belief, after CA Management communicated with RIAA, it agreed to participate
in the industry boycott.

There are more, similar, examples in the filing. There's also a discussion of some indie labels who did sign on, but then backed out, claiming pressure from A2IM. From the filing:

Defendants' unlawful efforts have also extended to extracting agreements from
labels that have already signed direct licenses to attempt to back out of them. By way of
example. on November 28. 2011. Sirius XM entered into a direct license with Paracadute, TMB
Productions, Michael Doughtv. and Michael Viola. On February 9, 2012, Paracadute and TMB
Productions requested that they be released from the deal. Surprised by this request, Sirius XM's
agent asked Darren Paltrowitz, the person with whom they had negotiated the deal, for an
explanation. Mr. Paltrowitz's, response was an e-mail with talking points strikingly similar to the
Defendants' press release, which Mr. Paltrowitz indicated were supplied by the bands' business
manager. That business manager is Perry Resnick, an artist manager with RZO LLC, and a longtime member of the SoundExchange Board. After further discussions, on February 22, 2012,
Mr. Paltrowitz wrote that he "relayed [Sirius XM's] feedback to RZO, and they -- per
conversations with A2IM and other folks beyond SoundExehange -- stand their ground about
wanting us to opt out" of the direct license. That same day. Mr. Paltrowity cut and pasted an email
he received from Mr. Resinick that stated: "I know for a fact that Rich Bengloff, the head of
A2IM ... is against this. Rich and I have had this exact conversation, and are both in
agreement that SoundExchange is the better way to go."

Of course, there are a few reasons why SoundExchange and its board members would be so against this. As noted earlier, they still think that the royalty rates should be much higher, and have indicated multiple times that in the next round of ratesetting at the CRB, they are going to push for royalty rates double to triple of what Sirius XM is already paying. That's certainly part of why Sirius would like to cut them out of the picture. But, as some have noted, doing direct deals outside of SoundExchange doesn't just let Sirius avoid whatever crazy rates the judges at the CRB choose out of thin air, but it allows them to argue that the actual market rate is lower. You see... the way the CRB works is that it's supposed to try to set a statutory rate that is effectively what the market would choose on its own. Historically, since there were no market-based deals, it had nothing concrete to base its decision on, other than what SoundExchange or Sirius told the judges. However, if Sirius is able to cut direct deals (and do them at an even lower rate) then when the CRB hearing comes around, Sirius now has empirical evidence of a lower market rate. That's a pretty big deal.

Honestly, I'm not sure either side in this fight comes out looking good. It's really just a fight about who pays how much, and who gets a cut. This is the kind of messy thing that happens when a clueless Congress decides that a clueless judicial board should magically "set rates" based on nothing in particular. Sirius XM is hardly an angel in this fight, but based on some of the quotes in the filing, there may be something of a case here -- though proving full on antitrust violations are not easy.

The real issue, it seems, is that groups like A2IM are supposed to represent the industry, but are not supposed to be a central point of collusion for the industry, driving policy decisions back to the labels. That's coordinated effort among competitors that could very well cross the line. The close-knit nature of the SoundExchange board makes all of this even more complicated (and again raises serious questions why Congress ever allowed SoundExchange to be birthed from the RIAA, rather than being truly independent in the first place). I can't image a court would actually dissolve SoundExchange, but if it turns out that this lawsuit has legs, things could get very, very messy in the industry (and it certainly could shake up A2IM in a big way as well). This is one worth paying attention to.

"again raises serious questions why Congress ever allowed SoundExchange to be birthed from the RIAA, rather than being truly independent in the first place"

Answered those questions yourself in the previous paragraph... "clueless Congress"

Also, I'm sure because they were offered a lot of money.

Also, because the RIAA represents artists! If they say that letting them do whatever they want is best for artists, why should anyone ever question that? Especially if questioning means you need to stop counting your huge pile of campaign donations for a minute...

Sound Exchange is Robbing Everyone!!!!

Sound Exchnage is literary rippin off copyright claimants who legally own the sound recording rights and perform their music self released on the internet threw CD Baby.
This really must stop.....It's wrong and Congress Must place a stop to this.

Re: Sound Exchange is Robbing Everyone!!!!

Simply greed

Ehh! I donít care. The RIAA made satellite so expensive, Iím already priced out of the market. Iím willing to pay only about $36/YEAR. Instead, I simply load my mp3 collection on a DVD and listen to that in my car. All that will happen is that SoundExchange will simply make satellite radio more expensive and price the service out of reach for even more consumers. That will cause a recursion effect ultimately causing the entire service to fail. Bad business model? Only when you factor in the greed of these licensing agencies.

Sound Exchange collects stray digital income and splits it 50/50 between band & label (that's the simplest explanation). One fascinating detail that flies in the face of its RIAA/Congressional origins is that the band/artist income CANNOT be paid to the label, no matter how much $ the band/artist owes the label- or how much the label CLAIMS the band/artist owes.

That's a huge deal, even though it hurts us a bit when a band who's legitimately in the hole to us for $2000 gets $500 that, if it were collected properly, we the label would apply to their $2000 debt. All we can do (and I do this) is ask the band nicely to pay us the $ to knock down their debt. But the fact that labels cannot talk their way into rightfully or wrongfully being paid their artists income is a big change.

Sound Exchange has astonished me with their good moves over the past year or so. Their "Artist Side" (the department that handles payment directly to bands) has been peppering me with requests for contact information for a host of bands whom we love but we had no idea anyone else did. I'm talking bands that were brief highlights of the underground who broke up in 1999 or 2003 or whatever. I've put them in touch with ex-band members and let them take it from there.

Sound Exchange is also readying a payment to our label. I have no idea how much it will be. The downside is that although we've been registered apparently for years, we were actually registered by an ex-business partner who has been collecting our share for a few years. Apparently SoundExchange will be paying us our back royalties and deducting the difference from the ex-business partner's other SoundExchange-registered companies. The resolution of this kerfluffle was quick on Sound Exchange's side & I appreciate that a lot!

As for the news covered by this post- I'm agnostic. Why would I want to chase after multiple sources of the same pool of digital income if I can get it all in one place? After all, this is $ that none of us previously knew existed. I think I'm not alone in thinking of this- wrongly, I know- as "free" money.

Wouldn't bands have to register w/ Sirius as well as with Sound Exchange? Judging from the pokiness of band members (myself included) that's not gonna happen & Sirius would be able to sit on the band side of the royalties until a band got its crap together enough to register through Sirius too.

Also, Sirius is only 1 digital source of Sound Exchange income. A savvy label/band would still need to be registered w/ Sound Exchange to get income from the other sources.

The one thing I don't agree with is the, "Let it all blow up!" approach. Look, someone out there charged customers money for songs, collected it, and now a portion of that $ is actually (gasp!) going to the bands & the labels who own or license those songs. To allow that someone who charged for songs to keep that $ without paying the bands/labels involved is just what Techdirt regulars complain about when overseas Performance Rights Organizations do- remember that article from last month about that?

Re: A reaction from the trenches

"Sound Exchange is also readying a payment to our label. I have no idea how much it will be."

When you get this payment, I would really like you to come back here and update us on how that goes for you. I.e. what you get, and the explanation behind it.

And no, this isn't some sarcastic BS internet throwaway comment - it's just because that this point (a check in front of you) is the point where most people's opinions start forming one way or the other.

Re: A reaction from the trenches

I fully agree with your conclusions that as Sound Exchange is actually paying the artists and the labels (in this case yours) for indie work then blowing it up wouldn't be the best thing in the world.

I'd rather these Sirius and Sound Exchange actually got down and actually negotiated with one another rather then fling lawsuits at each other.

While it does seem simpler to have one on one dealings for you and the artists I'm still left to wonder what a "current market rate" would be that isn't settled by a monopoly who have no competitive rate to deal with.

I'd be interested in what Sound Exchange charges other digital customers and how those rates are settled, whether by open bidding or by the CRB, no matter how clueless they may be. Power is in the information and how all that's done needs to come out.

Go Sirius

As a SirusXM customer I hope they kick Soundexchange's ass.

The only difference between Sirus and terrestrial radio is that Sirus' signal comes from a satellite and terrestrial comes from the ground. How the HELL does that mean that Sirus needs to pay extortion rates to a bogus entity like Soundexchange?

But of course our fabulous court system will of course punt this clear example of Antitrust violations and rubber stamp it as ok.

It is getting really hard to like and appreciate music these days when its all handled by vile middle manager scum that I totally despise.

The RIAA, at war with its customers on the internet, in the stores, and via satellite. Great strategy from a huge bunch of assholes.